22 августа 2018

Crypto liberation: FSB notifications not for all goods anymore

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It is known that the Eurasian Economic Union (EAEU) applies non-tariff measures in the form of a unified list of goods that are subject to import or export restrictions and prohibitions. This list has several dozens of sections each of which consists of goods with similar type, properties, HS code, etc. One of them is section 2.19 that includes encryption items and goods that contain encryption items.

Technically, any merchandise that supports cryptographic functions may be classified under section 2.19 as it comprises, besides specific types of products, clause “Other electrical devices and equipment with individual functions that contain encryption (cryptographic) items”. This is what customs checkpoints referred to when requested FSB notifications for any goods that could, in the customs officer’s view, contain encryption items. On top of that, the customs often made such decisions based solely on the HS code of a product, but not its properties or description.

Until July 2018, the Federal Security Service (FSB) of the Russian Federation had to register notifications for all these goods. This is because the legislative framework was being developed at the time when cryptography was not so widespread among consumer electronics. Today, however, almost all household products contain wireless modules (Wi-Fi, Bluetooth) and other components that include cryptographic functionality. As a result, the FSB was flooded with requests to register notifications for such goods as refrigerators, vacuum cleaners, microwave ovens, children’s radio-controlled toys, etc. Even an increase in staff did not help cope with the avalanche of paperwork.

During a panel discussion of this problem, the FSB senior management concluded to withdraw registration of notifications for goods that cannot be explicitly classified under section 2.19 according to their intended use. Although this decision was forced by necessity, it was not accompanied by any changes in the legislative framework, thus causing a mixed reaction among international trade participants. It turns out that for a significant period of time the FSB considered refrigerators as goods that are subject to inclusion in the register of notifications, but starting from July 1 stopped doing it without any valid reasons whatsoever. Moreover, it was not all that clear at the customs either since officers in the field did not have enough competence to assess whether a product is included in section 2.19 or not, and asked to provide a written clarification from the FSB.

Because of this, the FSB had to start issuing so-called information (exemption) letters clarifying if it is required to register a notification for specific merchandise. Consequently, the amount of paperwork for the FSB officials remained the same, but confusion in the market has emerged. We believe that a workaround for the current situation is to adjust the legislative framework so that it contains specific types of goods that can be included in the register of notifications as well as constantly improve the framework to follow up the technological progress.

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